Canada's banking regulator has tweaked its new mortgage stress-testing rule, ensuring home buyers will not have an unintended incentive to sign up for shorter-term mortgages.
The Office of the Superintendent of Financial Institutions published revised final guidelines Tuesday for its controversial stress-testing rule, which requires buyers making down payments of more than 20 per cent of a home's value – who do not need mortgage insurance – to prove they could still afford their mortgage payments if interest rates were 200 basis points (two percentage points) higher than the rate they negotiated.
Some real estate and lending organizations criticized the proposal because they said it would give borrowers an incentive to favour shorter-term mortgages because they typically have lower interest rates, making it easier to pass the stress test standard. Critics said it would leave borrowers in a riskier position because they would be more vulnerable to interest rate increases with mortgages that come up for renewal more often.
"The adjusted approach provides a floor intended to dampen the incentives to take variable or shorter-term fixed rate mortgages," OSFI said in its release Tuesday.
OSFI said it received more than 200 submissions to its original proposal, published in July.
Earlier this month, OSFI superintendent Jeremy Rudin said the regulator sees potential risks in a combination of high household indebtedness, high real estate prices in some cities and low interest rates on mortgages.
"We are not waiting to see those risks crystallize in rising arrears and defaults" before acting, he said in a speech on Oct. 3.
Industry stakeholders expressed concerns about the original proposal, focusing mostly on the plan to impose tougher stress testing on uninsured mortgages as punitive to borrowers. Groups representing home builders, real estate agents and credit unions all voiced their misgivings about the original proposal, with some warning that less-wealthy home buyers could be shut out of the market or forced to accept less-favourable loan terms.
The new guideline also prohibits regulated lenders from "bundling" a mortgage loan with another lender, a practice some alternative lenders have used to spread risk on a mortgage, typically providing the borrower with a single "blended" interest rate. OSFI said the practice is used to circumvent its mortgage underwriting limits.